I am looking into the telegraph’s impact on international financial markets and if the telegraph caused price convergance across markets.
The literature I have read indicates that the telegraph likely caused prices to converge across markets. Christopher Hoag in his paper, entitled The Atlantic Telegraph Cable and Capital Market Information Flows uses data to show that equity prices did converge after the adoption of the telegraph between the U.S. and U.K in the late 1800s.
Peter Ferderer’s paper, Advances in Communication Technology and Growth of the American Over-the-Counter Markets, 1876-1929, is of interest because it provides some insight into what happened to the structures of financial markets after the implementation of the telegraph. His conclusion was that telegraph fostered the growth of over-the-counter exchanges.
The paper Monetary Union, Institutions and Financial Market Integration: Italy, 1862-1905 by Gianni Toniolo, Leandro Conte, and Giovanni Vecchi is noteworthy because it could explain what the data may show in terms of commodity price convergence for other less developed countries. It took 25 years after the telegraph was founded for commodity prices to converge in Italy. A single Italian financial market appeared only when the state prevailed upon local vested interests by enforcing nation-wide financial market legislation. The key takeaway here is that the correct legislation and regulations are necessary in order for prices to converge and for a country to take part in the global financial markets.
Joanna Yates’ paper on The Telegraph’s Effect on Nineteenth Century Markets and Firms paints a picture of what might have developed in a given country after the adoption of the telegraph. Yates arrives at the conclusion that the telegraph encouraged the growth and efficiency of markets by reducing communication time and costs. However, she finds that it also encouraged the growth and vertical integration of firms by forwarding the emergence of national market areas to absorb local and regional market areas. So why sometimes did the telegraph encourage efficient markets when other instances it created large vertically integrate firms? The asset specificity and the complexity of the product are the reasons. If asset specificity and complexity are low, Yates expects an efficient market to form.
The final paper which I want to include in this post provides me with potential proof of the telegraph’s impact on a particular financial market. The paper is The Magnetic Telegraph, Price and Quantity Data, and the New Management of Capital by Alexander James Field. The first major point that Field makes that applies to financial markets is that the telegraph certainly led to more liquidity in the U.S. markets. This seems intuitive but more liquidity should also mean higher trading volumes. The second major point is that the telegraph likely reduced uncertainty in the financial markets. Since investors now had access to prices on updated basis, uncertainty in investing was reduced and savings constraints in order to earn a return were relaxed. This allowed for safer investment and more savings in the form of real capital. Savings data and the total size of financial markets in a country could be several more good measures of the adoption of the telegraph and increased savings and reduced uncertainty appear to be products of the telegraph’s impact on financial markets.
I have obtained data on wheat prices across 102 different cities in Europe and the U.S. from 1800-1913. This data was obtained from David Jacks’ homepage. David Jacks is an associate professor of economics at Simon Fraser University in Burnaby, British Colombia and a faculty research fellow at the National Bureau of Economics Research in Cambridge, Massachusetts.
The data is listed as monthly observations and was compiled by David Jacks from a variety of sources. In the case of multiple series for one city, basic hedonic regressions using time series dummy variables were the basis of estimating the quality-adjusted price. Unless otherwise noted, prices were assumed to refer to the price of the locality’s average grade of grain; thus inter-market and inter-temporal differences in quality are “soaked up” up in the estimates of trade costs, assuming a constant price mark-up exists or can be approximated for different grades of wheat over short periods of time.
The data is in terms of U.S. Dollars per 100 kilograms of wheat. The exchange rates used in transforming the prices into U.S. Dollars were derived from the Global Financial Dataset by Brian Taylor.
The countries captured in the dataset include Austria-Hungary, Belgium, France, Germany, Italy, Norway, Russia, Spain, the United Kingdom, and the United States. Some cities have gaps in the data or there is a lack of data until roughly after the invention and implementation of the telegraph. Therefore, the data on some countries will not be useful for the purposes of my paper.
Overall, this data serves as a great source to determine the differences in wheat prices across different regions. Although it shows the differences, it does not explicitly state why the differences exist. Communications capabilities, transportation costs, futures markets, tariffs, economic shocks, and political shocks could all be contributing factors to the prices shown.
I will calculate and look at the monthly percentage changes in price differences across several counties that I have data for. I will compare how closely the prices change in percentage terms between countries before and after the implementation of the telegraph to determine if the telegraph had an effect. A regression would need to be run to properly determine what is driving the price differences or lack of price differences. However, for the purposes of this paper, I will stick with the more basis, monthly percentage change method for simplicity and to allow me to draw some quick implications from the data.
Depending on what the data shows, I will then look back to literature and relevant economic history for further support or to help explain why prices did not converge.